Branching Evolves as Membership Grows

The number of branches operated by U.S. credit unions continues to decline, though surviving locations are evolving to encompass all aspects of retail delivery.

Banks only report branch-level data in the second quarter. For comparative reasons, June 2018 credit union branch data is used for part of the analysis. Final second quarter 2019 data won’t be available until the second week of September.

Credit unions nationwide shed 646 deposit-taking branches from mid-2017 to mid-2018, a decline of 3.4%. As of June 2018, there were 18,135 credit union branches operating in the U.S. Over the same period, banks increased their overall branch count by 0.3%, or 296 branches to 87,971 as of June 2018.

Between June 2017 and June 2018, the total number of credit unions in the U.S. dropped 3.8% to 5,596 while total membership increased 4.3% to 115.4 million. This dynamic has led to the average number of members per credit union rising 8% from 5,891 in the second quarter of 2017 to 6,362 in the second quarter of 2018. Credit union branches nationwide have grown digital capabilities and delivery channels to effectively serve a higher volume of members.

Branching Efficiency

Institutions nationwide are lowering overhead expenses by reducing branch counts and pushing members toward online and mobile channels. They largely focus on changing the in-person branch experience by encouraging members to use digital channels for routine transactions – typically through in-branch ITMs or tablet-equipped kiosks – and by employing a universal employee model to ensure productive interactions.

As a result, the efficiency ratio (including provision for loan loss) across the industry is down 2.6 percentage points since March 2014 to 78.1% in March 2019. Additionally, in 2019, credit unions generated $3.24 per dollar spent on salaries and benefits, up 3.2% in the past year and 10.2% in the past five, a potential sign that the reimagined models are creating more productive employees.

As of March 2019, annualized operating expenses increased 7.2% year-over-year, from $43.6 billion to $46.8 billion. As financial institutions reaped the benefits of the rising rate environment in 2018, interest income grew 16.5%, from $51.3 billion in March of 2018 to $59.8 billion in March of 2019, eliminating the gap between the operating expense ratio and the net interest margin.

From the first quarter of 2018 to the first quarter of 2019, the net interest margin rose nine basis points while the operating expense ratio increased three basis points. As of March 2019, both ratios were equal at 3.12%. This signifies that credit unions are covering operating costs through the margin they collect from interest earning assets. Just five years ago, the operating expense ratio was 24 basis points higher than the net interest margin. This dynamic is directly reflected in the profitability of credit unions nationwide as the average return on assets increased five basis points year-over-year to 0.95%.

Adding Members

Total credit union membership continues to increase, approaching 120 million in the first quarter of 2019. From March 31, 2018 to March 31, 2019, credit unions added about five million new members, a growth rate five times that of the U.S. population (0.62% for 2017 to 2018) and the fastest recorded since 2002.

Despite the declining number of physical branch locations, cooperative membership has increased 4% year-over-year. But credit unions didn’t simply add members, they also deepened member relationships. The average member relationship reached $19,156 in March 2019, a $570 increase over the past year. Broken out, the average loan balance per member increased 5% year-over-year to $8,400 while the average share balance per member hit $10,756, up 1.6% annually.

In addition to rising loan and share balances per member, product penetration is increasing across the board. A growing membership base runs the risk of diluting penetration metrics if member product adoption does not keep pace with simple member growth; however, that is not currently the case with U.S. credit unions. Product penetration rates were up across the board over the past five years, most notably share draft penetration, which rose 5.1 percentage points from March 2014 to 58.1% as of March 2019. Credit card, auto and real estate penetration rates are up 1.5, 4.5 and 0.1 percentage points over the past five years, respectively.

Credit unions have improved market share metrics in all major loan products since March 2014. Cooperatives finance 18.6% of auto loans nationwide, up 3.6 percentage points over the past five years. Eight percent of all mortgages are funded through a credit union, rising 1.6 percentage points since 2014. Credit card market share is up 90 basis points over the same period to 6.1%.

Larger credit unions, employing economies of scale, will likely offer a more diverse range of electronic delivery channels than their smaller counterparts. For instance, less than 2% of the 1,403 credit unions under $10 million in assets offer remote deposit capture while only 9.6% offer mobile banking as of March 2019. Alternatively, among those over $1 billion, 97.2% offer remote deposit capture and 99.1% offer mobile payments. As the table displays, these percentages are heavily correlated with the asset range of credit unions.

It is almost impossible to maintain a physical presence everywhere members and potential members live. Technology enables credit unions to offer a supplementary, centralized virtual support model, providing flexibility to meet changing member needs while offering a consistent and reliable level of service.

Maya Neuman is an Industry Analyst for Callahan & Associates. She can be reached at 800-446-7453 or marketing@callahan.com.